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DLF – 3QFY2011 Result Update
Angel Broking maintains a Neutral on DLF.
DLF’s 3QFY2011 results were in line with our expectations, largely driven by highmargin
plotted sales. Despite the festive season, new launches continued to
remain subdued due to delay in getting approvals. DLF is likely to miss its yearly
guidance of 12mn sq. ft., i.e. doubling its sales volumes in 4QFY2011 looks
difficult. Net debt-to-equity during the quarter increased to 0.79x from 0.75x in
2QFY2011 on account of share dividend payment and preference capital
redemption. Management has guided net debt equity of 0.6x by FY2012E. We
maintain our Neutral rating on stock.
Higher interest cost and depreciation drags profitability: DLF reported moderate
revenue growth of 4.7% qoq (22.4% yoy) to `2,480cr, driven by strong leasing
volumes and non-asset sales of `403cr. Operating margins came in at 47.5%, up
829bp qoq and 587bp yoy, on account of revenue recognition from high-margin
plotted sales in Gurgaon. Consequently, operating profit grew by 39.6% yoy and
26.8% qoq to `1,178cr. Interest costs grew by 66.6% yoy (down 1.3% qoq) to
`428cr because of increased leverage. Further, depreciation cost increased by
101.4% yoy (4.6% qoq) to ` 161cr. Consequently, reported PAT came in at
`466.0cr, down 0.4% yoy (up by 11.4% qoq), marginally below our estimates
(`474.6cr).
Outlook and valuation: DLF intends to launch plotted development in Gurgaon
and Chandigarh to meet its planned sales target of more than 12mn. sq. ft. in
FY2011. There is a risk to the company’s guidance, considering the delay in
approvals and steep price rise in recent months. We expect DLF to report 10.5mn
sq. ft. in FY2011 and expect flat volume growth in FY2012E, considering weaker
macro environment. Consequently, we have downgraded our FY2012E estimates
by 26.3%. Further, the company lacks near-term triggers, given the kind of muted
visibility on debt reduction and new launches (NTC mill). We value the stock at
`222 i.e. 15% discount to our one-year forward NAV. Hence, we recommend
Neutral on the stock.
Investment arguments
Higher leverage remains a concern
The DAL/Caraf merger, subdued new launches and purchase of compulsorily
convertible preference shares (CCPS), which were earlier issued by DAL to SC Asia
(worth `3,085cr), have increased the net debt level to 0.79. This resulted in net
debt of `20,694cr by the end of 3QFY2011. Further, promoters have `1,600cr of
CCPS in the merged entity, which carries a dividend rate of 9%, resulting in annual
cash outflow of `140cr. These CCPS are convertible post April 2011.
Consequently, interest payments as a percentage of EBITDA remain on the higher
side (60%). DLF is targeting to reduce its net debt/equity to 0.6x by the end of
FY2012E. The reduction in the gearing level will depend on hiving off non-core
assets and successful new launches.
Stability in leasing and new launches holds key for stock
performance
DLF’s non-residential segment accounts for 55% of our GNAV. During FY2010,
DLF leased only 0.93mn sq. ft. from commercial and retail space. However, the
company has witnessed improvement in leasing in 9MFY2011, where it could
leased out 4.4mn sq ft. DLF expects leasing activity to continue to show stability
over the next 12 months and expects to list DAL as a business trust/ REIT some time
in CY2012, which can be value-accretive for DLF’s shareholders at the lower cap
rate. However, this will depend on a sustainable recovery in the commercial
leasing segment. After the merger of DLF and DAL/Caraf, the company has 20mn
sq. ft. of rent-yielding assets, which will generate `1,500cr–1,600cr of rental
income in FY2012E. Further, there has been delay in new launches on account of
delay in getting new approvals. In 9MFY2011, it could launch only 4mn sq. ft.,
much below its peers. We believe management’s guidance of >12mn sq. ft. of
development volumes in FY2011E will be a challenging task.
Fairly valued
DLF has a challenging task in FY2012E to bring down its gearing levels, for getting
fast approvals in order to have successful new launches and for monetising its
non-core assets at a reasonable value. We estimate DLF to sell 10.5mn sq. ft. of
residential volumes in FY2011E and expect flat growth in FY2012. In our view,
there is a limited upside to our launch estimates, considering the steep price rise in
the recent months. We have assumed a 5% reduction in commercial and retail
prices, but a 5% rise in residential prices, from the current level, in FY2011E.
Further, the company lacks near-term triggers, given the kind of muted visibility on
debt reduction and new launches (NTC mill). We value the stock at `222 i.e. 15%
discount to our one-year forward NAV. Hence, we recommend Neutral on the
stock.
